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What is Functional Currency?

April 23, 2014

Tax Question:

What is functional currency and can I keep my corporate records in a currency other than the Canadian dollar?

Facts:

Under Generally Accepted Accounting Principles, a company may prepare its financial transactions using its functional currency. The definition of functional currency is the currency of the primary economic environment in which the entity operates. This may not be the Canadian dollar.

Discussion:

You may wish to issue your financial statements in a currency other than the Canadian dollar if that is the currency your company mainly operates in (your functional currency) and if it would make your financial statements more user-friendly for your main users (suppliers or lending facilities). To determine your company’s functional currency, there are several factors that should be considered:

Primary indicators

The currency of your selling prices and the currency of the country whose competitive forces and regulations mainly determine the selling prices. If you sell mainly to the United States and it is the American competition and demand that determines your selling prices, your functional currency may be the American dollar. The currency of your labour, supplies/inventory and other costs of providing the goods and services. If your product is built in Europe and the majority of your labour is paid in European funds, or if the bulk of your materials and costs are in European funds, your functional currency may be the Euro.

Secondary indicators

The currency of your financial resources, both debt and equity. Are most of your bank accounts and corporate debt in Canadian or American dollars? The currency of your operating activities. Are the majority of your operating expenses and sales transactions in Canadian dollars or in Euros? If the company is part of a larger group, the currency of the group. Are your corporation’s activities the extension of a larger corporate group and what is the functional currency of the larger group? If the answer to the majority of these questions is not the Canadian dollar, then there may be valid reasons to prepare your financial statements in your function currency.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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